Public Sector Finances Look Vulnerable in the Long Term

23rd June 2014

Data released on 20th june 2014 by the UK Office for National Statistics showed that public sector net borrowing for May 2014 was £13.3 billion, £0.7 billion higher than last May and higher than consensus expectations of £12 billion.

With year-on-year GDP growth now at 3.1% in the latest (Q1 2014) figures, the recovery is boosting certain areas of taxation compared to a year ago. Taxes on production, of which VAT is an important component, registered a 5.5% rise on last year, helped along by retail sales growth of 3.9%. Corporation tax receipts were up by 17.5% year-on-year; however, the squeeze on incomes meant that income and capital gains tax showed a 1.4% fall, and as this is a large component of government receipts, it helped central government receipts fall by 7.5% over the year from last May.

Public sector expenditure showed a small 0.3% rise over the year to May. Net social benefits, the largest component of spending, was down 0.8% on last May, which helped to keep the total down.

Today's release also gave a third estimate for total borrowing over the financial year 2013/4: this was £107.0 billion, narrowly below the £107.8 billion target. While this will cheer the Chancellor in the short term, the longer term borrowing targets may be harder to meet. Growth is an important component affecting government borrowing, and over 2014, the Office for Budget Responsibility's target is based on economic growth of 2.7%, which the UK economy is on track to exceed. In fact Cebr believes UK growth will stand at 3.0% over 2014. However, in the longer term, two assumptions behind the OBR's forecast of rapidly declining debt figures over 2017-19 look more shaky: its business investment forecasts appear to be overly optimistic, and Cebr believes that its assumption of consumer spending growth of 4.9% on average over the next five years is unlikely to be met.